Decision making contexts: How do building owners decide what to do?

Now, we may be biased because Geoff is a contributing author to the book, but we honestly can’t think of a book more fundamental to the emerging field of energy efficiency finance than Scott Muldavin’sValue Beyond Cost Savings: How to Underwrite Sustainable Properties, published through the Green Building Finance Consortium (GBFC). We will try not to go overboard, but every so often we will do a write up of an important concept in the book and what it means for energy efficiency financing.

Today’s topic is the GBFC’s framework for how real estate decisions are made by owners. The framework breaks decisions relating to real estate into 3 levels: strategic, tactical, and property-specific.

Strategic questions would include considerations like “should we invest.” Tactical decisions would be something like “which properties?” And of course, property-specific considerations are the next level of detail – “are the returns of an energy efficiency investment at a particular property sufficient to compensate for the risks taken?” Or “what efficiency measures should we implement in a particular building?”

The thing that is most intriguing about this framework is that it can help explain one of the things that some energy efficiency advocates find so frustrating about building owners – namely the tendency for a number of senior real estate people to fully agree, understand, and even evangelize the fact that energy efficiency is a great investment. Yet many of these exact same senior real estate people do not pursue energy efficiency to the most economically efficient extent that is possible in their own portfolios.

Where is the missing link? We think the GBFC’s decision level framework sheds some light on this situation. It’s very easy for a real estate owner to pick up a research report or look at broad data trends and understand that, at a high level, investing in energy efficiency makes intuitive sense. This is why the strategic decision, “should we invest in energy efficiency,” is often the easiest.

The next level of tactical decision making is where things begin to get difficult for decision makers. Let’s assume a building owner has made the strategic decision that retrofits are broadly good investments and wants to invest. Now how do they implement that in their buildings? The difficulty is that the quality of the data at a tactical level is not nearly as good or as widely accessible as the strategic level data. While an owner can certainly take CBECS data and make broad inferences regarding energy usage and building type, the reality is that the data are not really sufficient to make a fully defensible fiduciary decision.

This lack of tactical data and support often requires the owner to hire an energy auditor or outside consultant to analyze a building portfolio and develop the tactics for how to choose the best retrofit candidates. As the building owner implicitly knows, this expense is merely exploratory, as tactical decisions are still one level away from property level decisions, where real life real estate decisions must be made. The end result: a material expense with uncertain returns.

Of course, if a building owner makes it past the tactical stage, the real thorny questions appear. What will the particular tenants in this building think? Is the building separately sub-metered? None of these questions by themselves are insurmountable, but in aggregate, they serve as a psychological barrier that can often keep a building owner from making the decision to undertake a retrofit. Death by a thousand cuts strikes again.

The key takeaway from the decision making framework is that although the business case has been established for retrofits at a strategic level, this does not necessarily translate into implementation. To use an analogy, every corporation knows it must be innovative. Any corporate board would obviously support such a strategic statement. However, the difficulty arises in how to tactically apply these things to the daily operations of a business. How does a company take “innovation” and turn it into something actionable? It is clearly very difficult. Turning back to energy efficiency, from a building owner’s perspective, a “retrofit” can be something almost as abstract and hard to implement as a concept like innovation. It is up to energy efficiency advocates to help owners make the appropriate tactical and property level decisions that are necessary to make a retrofit a reality.